The Federal False Claims Act

Introduction

The Federal False Claims Act permits a person with knowledge of fraud against the United States Government, referred to as the "qui tam plaintiff," to file a lawsuit on behalf of the Government against the person or business that committed the fraud (the defendant). The False Claims Act's “qui tam” provision1 authorizes people to file suit on behalf of the United States against those who falsely claim federal funds. The government then reviews the case and decides whether to take part in the suit. If the action is successful the qui tam plaintiff is rewarded with a percentage of the recovery.

According to the Department of Justice, the federal government obtained more than $1.4 billion in settlements and judgments for fraud committed against the government in fiscal 2004-05, with health care claims accounting for much of the total.

One of the biggest recoveries in the 12 months that ended Sept. 30, 2005, was $327 million from HealthSouth Corp.

The United States is cracking down on health care fraud as state and federal governments attempt to rein in spiraling medical costs. Of the 2004-05 total, $1.1 billion was recovered through lawsuits by so-called whistleblowers under the Federal False

Claims Act, which were mainly health care-related. Of particular note particular is the

$41.9 million settlement with PricewaterhouseCoopers LLP for alleged false claims for travel expenses in contracts with numerous federal agencies, and $30.5 million recovered from Harvard University in connection with a U.S. Agency for International

1 The phrase qui tam is a shortened version of the Latin term “qui tam pro domino rege quam pro se ipson in hac parte sequitur,” which means “he who brings the action for the King as well as for himself.” Under the Act, a person bringing a qui tam action is referred to as a “relator,” or, in more common parlance, this party is known as the defendant.

1 Development agreement to advise Russia in its transition to a market economy.

If the government intervenes in a qui tam action, the person who filed the suit is eligible to receive as much as 25 percent of any judgment. During the twelve months ended September 30, 2005, whistleblowers were awarded $166 million. The fiscal 2005 total brings total recoveries since 1986, when Congress strengthened the civil False

Claims Act, to $15 billion, according to the Justice Department.

Exhibit 1 presents background information about the Act, amendments to the Act, and recent lawsuits that were successful.

The Case

Charlie Henneson shook his head in disbelief as he visualized it all disappearing before his eyes – his dream to be the administrator of a local medical facility. He couldn’t believe it was all happening because one of his best friends, Francis Lundon, had blown the whistle on something that Henneson felt was standard practice in the industry.

He knew of three other facilities in the state that did the same thing Rolliter Medical

Center was accused of doing. What’s worse, Henneson didn’t personally benefit by any of the alleged wrongdoings. Why me, he wondered?

On October 24, 2007 the Rolliter Medical Center agreed to pay an $80 million fine, while not admitting any wrongdoing in connection with compliance and conflict of interest charges brought by Francis Lundon with the aid of the U.S. Justice Department.

The payments will be stretched out of four years with interest at 5% accruing after the first year on unpaid amounts. The total payments will consume 60 percent of the medical centers’ reserves. Rolliter Medical Center officials said the facility will still have enough cash on hand to cover 62 patient days (over $50 million). However, this is a relatively

2 low amount by customary standards and some current patients and residents of the small southeastern town of Rolliter are concerned about the long-term viability of the center and the potential effects on the local community. Trustees of the center said that they agreed to the settlement to avoid a time-consuming, drawn-out and potentially even more costly legal battle with the federal government.

The primary issue in the case is the allegation that beginning in 1997, Rolliter agreed to pay remuneration to induce physicians to use its facility. Allegedly, Rolliter paid millions of dollars into a “Physicians Professional Development Plan” and entered into a number of physician service agreements including medical administrator contracts, joint lease agreements with a variety of medical specialists associations, and a travel fund. The government contends that the remuneration was paid directly to physicians affiliated with the medical specialists associations or funneled to the physicians through third parties.

According to the government’s lawsuit, the medical center submitted false claims to Medicare for inpatient and outpatient hospital and home health services referred or ordered by physicians that were included in the professional development plan payments.

The settlement that was entered into on October 24, 2007, said the claims were false because the Stark Law2 prohibited Rolliter from billing Medicare for items or services referred or ordered by physicians with whom it had such financial relationships.

An attorney for Rolliter responded to questions from the press after the settlement

2 The Stark statute applies only to physicians who refer Medicare and Medicaid patients for specific services to entities with which they (or an immediate family member) have a “financial relationship.” Referrals under the Law include: any physician request for a service, item or good payable under Medicare or Medicaid; a referral for consultation and all the services ordered as a result of the consultation; and a prescription for a course of treatment. Referrals within a physician group are included. Services included, known as “designated health services,” are, among others: clinical laboratory services; durable medical equipment and supplies; occupational therapy services; outpatient prescription drugs; home health care; radiation therapy; prosthetics, orthotics and prosthetic devices and supplies.

3 by explaining that the federal government had “gotten some sensitive information” about inner workings of the medical center from a source within the medical center. The fact is that Francis Lundon, a disgruntled physician who was passed over for chief of surgery, had kept covert records about the “Physicians Professional Development Plan” using information from files left open by other physicians at the medical center and referring to conversations that he had overheard. He went to the government with his information and the U.S. Department of Justice brought a lawsuit against Holliter Medical Center.

The whistleblower stands to receive $16 million from the settlement.

Questions

Answer the following questions with respect to actions taken by Francis Lundon.

1. (a) Do you think it was disloyal for Lundon to bring a lawsuit and serve as the

government’s whistleblower in this case? Why or why not. To whom does

Lundon owe primary responsibility?

(b) Do you think it was ethical for Lundon to do what he did? If you answer

“yes,” then support your answer with ethical reasoning. If “no,” be sure to give

specific reasons why not.

(c) If you were in Francis Lundon’s position, is there something else you might

have done that Lundon didn’t do? Be specific and include what it is you would

have done differently, if you believe that your actions would have taken a

different path.

2. Given that the medical center’s financial position is threatened by the settlement

and that it might affect long-term care at the facility, not to mention the economic

well-being of the town, do you think the government should have taken this into

4 consideration in going after Rolliter Medical Center? Why or why not? Did the

medical center fail in its social responsibilities to the doctors, nurses and staff at

the facility? What about to the patients? To the town of Rolliter?

3. Some critics of the Federal False Claims Act contend that it encourages

whistleblower’s to gather evidence, bring a lawsuit against the employer, and get

a big pay day in the future. Do you agree with this claim? Is it “wrong” for a

person, to do such a thing? Why or why not?

5 Exhibit 1

The Federal False Claims Act

Background of the Act

The Federal False Claims Act (Title 31 of the U.S. Code Sections 3729-3733) was enacted in 1863 during the Civil War to deter fraud by contractors who were supplying the Union Army. The Act provided a civil cause of action and sanctions of double damages and penalties of $2,000 per false claim for those found to have defrauded the Government.

The 1986 Amendments

Prior to 1986, very few cases were brought under the Act in part because a 1943 amendment to the Act barred qui tam3 actions if the Government had knowledge of the of the relator’s allegations prior to the filing of the suit. A number of suits were dismissed under this provision because the relator was the original source of the allegations in the filing but that person had disclosed the allegations to the Government prior to filing the suit. This fact, coupled with widespread media coverage throughout the 1970s and 80s of rampant government fraud caused Congress, in 1986, to enact revisions to enhance the provisions of both the Act and its qui tam provision.

The 1986 Amendments had substantially strengthened the Act and its enforcement. The 1943 bar regarding information in the possession of the Government was eliminated and replaced with language that allows such cases to be brought so long as the relator is an "independent source" of the allegations in a complaint. The Amendments also clarified the level of intent necessary to establish a violation. Since the Amendments, it is not necessary that a defendant be proven to have intentionally defrauded (had knowledge of the fraud) the Government. Rather, it is sufficient to establish that the defendant acted with "reckless disregard" for the truth of the information in its claim or in "deliberate ignorance" of the information provided, a lesser standard sometimes referred to as “constructive fraud.”

The Amendments also clarified that the burden of proof to sustain an action brought against the defendant is the same as that in a typical civil action, i.e., the "preponderance of the evidence," and not the higher burden of "clear and convincing evidence," as some courts had ruled. These amendments significantly aided a relator's cause in bringing an action and sustaining a victory under the Act.

3 The phrase qui tam is a shortened version of the Latin term “qui tam pro domino rege quam pro se ipson in hac parte sequitur,” which means “he who brings the action for the King as well as for himself.” Under the Act, a person bringing a qui tam action is referred to as a “relator.”

6 The 1986 Amendments also significantly increased the penalties. From the enactment of the Act in 1863, until 1986, the Act provided for the recovery of double damages and $2,000 per false claim. The penalties were increased in 1986 to treble (triple) damages and a per claim assessment of between $5,000 and $10,000 to be determined by the Court. Under the 1986 Amendments, a Government contractor submitting 100 false claims and overbilling the Government by $100,000 may be liable for as much as $1,300,000.

Of particular note is that prior to 1986, the Act provided that a successful qui tam relator was entitled to up to 25% of the proceeds to the Government in an action prosecuted by the relator. The 1986 Amendments changed the relator's percentage to not less than 25% nor more than 30%. The percentage now stands at between 15-25%. Moreover, under the Amendments, if a relator is successful then that party is entitled to recover attorneys' fees, as well as costs and expenses.

The 1986 Amendments also contained a whistle blower provision which protects an employee from retaliation by his employer in the event the employee becomes involved in the filing or investigation of an action under the Act against his employer. In the event an employer retaliates, the Act provides for the employee's reinstatement, double the back pay plus interest, and any "special damages."

Recent Settlements

Two cases stand out in recent times above all others as examples of the magnitude of these cases: The Northrop Grumman case the HCA settlement with the Government.

Northrop Grumman

On June 9, 2003, Northrop Grumman agreed to pay $111.2 million to the federal government in an out-of-court settlement to end a whistleblower lawsuit alleging that TRW Inc., which was acquired by Northrop, padded bills submitted to the government under space and technology contracts.

The "qui tam" lawsuit, which the federal government joined, charged that TRW defrauded the government through deceitful accounting practices from 1990 to 1997, including billing the government for work done on non-government contracts.

At the time, Daniel S. Goldin, the former NASA administrator, was general manager of TRW's space and technology group, which was at the center of the fraudulent scheme. The lawsuit said that Goldin approved mischaracterizing at least some of the charges to the government.

As part of the litigation, the whistleblower, Richard Bagley, and the government won a series of rulings, known as "summary judgments," in which the court essentially said the undisputed evidence showed that TRW had overcharged the government. The collaboration between Bagley’s attorneys and the government led to the successful action

7 and settlement of the case. The government agreed to pay Bagley $27.2 million, which was 24.5% of the settlement.

Bagley and the government said TRW defrauded the government in several ways, including:

 Charging to government contracts in 1995 virtually all of the $11 million in costs to develop a proposal to build and operate a satellite-based telephone system called "Odyssey," a purely commercial project that TRW later abandoned.  Inflating overhead costs charged to the government to recoup certain nonreimburseable costs to develop its "Universal Spacecraft Bus," the part of a spacecraft that delivers satellites into space, a project that also was abandoned.  Allocating certain research and development costs of its Center for Automotive Technology to unrelated contracts the government had with TRW's Space and

On June 26, 2003, HCA Inc. (formerly known as Columbia/HCA and HCA - The Healthcare Company) agreed to pay the government $631 million in civil penalties and damages arising from false claims the government alleged it submitted to Medicare and other federal health programs. It was the most comprehensive health care fraud investigation ever undertaken by the Justice Department, working with the Departments of Health and Human Services and Defense, the Office of Personnel Management and the states. The settlement resolves HCA's civil liability for false claims resulting from a variety of allegedly unlawful practices, including cost report fraud and the payment of kickbacks to physicians.

Robert D. McCallum, Jr., Assistant Attorney General for the Civil Division said: "Health care providers and professionals hold a public trust, and when that trust is violated by fraud and abuse of program funds, and by the payment of kickbacks to the physicians on whom patients and the programs rely for uncompromised medical judgment, health care for all Americans suffers."